Cima says it is loyal to 1st offer
BY JIM MCCARTNEY
Pioneer Press
Is Cima Labs being faithful or coy?
The Eden Prairie-based drug company vowed fidelity to its original merger partner, AaiPharma, Tuesday, rejecting what most investors saw as a better offer from Cephalon. The two drug makers are vying to buy Cima's technology that allows medicines to quickly dissolve in the mouth so patients don't have to swallow pills with water.
But at least two major shareholders saw the move as a play for a sweeter bid. Those same investors vowed they would never approve the marriage that Cima's board appears to be backing with AaiPharma.
Cima board members said that the Cephalon bid was not a "superior proposal," and that they would not negotiate with the West Chester, Penn.-based drug company. Cephalon sells Actiq, a medicine to treat cancer pain that is delivered in the form of a lollipop.
A merger with AaiPharma, a Wilmington, N.C.-based maker of pain pills including Darvon, is in the long-term interests of shareholders, the Cima board said.
That decision "baffled" Cephalon officials. After all, Cephalon's bid was $26 a share in cash, compared with a stock swap that AaiPharma offered that is valued at $24.50 a share.
But the "rejection" makes sense to at least two large Cima investors. They see the company's move as a negotiating ploy. Wall Street agrees, given that Cima Labs shares closed at $26.80 Tuesday — down 19 cents a share, but above either of the merger proposals.
"Cima is entering into a sparring contest with Cephalon, trying to draw out a higher offer," said Matt Arens, a senior research analyst with Kopp Investment Advisors, an Edina money management firm that owns a 6.8 percent stake in Cima.
What's more, Cima is loath to directly negotiate with Cephalon because it is liable to pay an $11.5 million break-up fee to AaiPharma if it starts talking to other suitors.
While Arens views Cephalon's offer of $376.6 million in cash as "clearly superior" to AaiPharma's, he believes it does not reflect Cima's value, which he thinks is well above $30 a share and perhaps as high as $40 a share.
Cima has $130 million in cash and a fast-dissolving pill technology worth $250 million, which together exceeds Cephalon's offer, Arens said. Plus, Cima has a pill form of a cancer pain relief drug that could hit the market in two years, directly competing with Cephalon's Actiq, which produces $250 million a year in revenue.
By buying Cima, Cephalon turns a potential competitor into another way to sell the drug.
Lance Helfert, president of West Coast Management based in Ventura, Calif., agrees with Arens that both bids are too low. West Coast Management and its affiliates own about 365,000 shares, or 2.5 percent of Cima's shares. Helfert said Cima would be better off either buying back shares or using its large cash balance to pay a shareholder dividend than take either offer. He argues that Cima could hit a growth rate of 30 percent — a prediction made by Cima's top officers.
Arens and Helfert both think it's likely that Cephalon will improve its offer. If it doesn't, they anticipate another bidder may enter the fray with a better offer. If that doesn't happen, both are certain that Cima's shareholders will reject the deal.
"I haven't talked to a single Cima shareholder who likes the AaiPharma deal," Helfert said.
Cephalon has no plans to sweeten its offer, but plans to try to talk to Cima board members, said Bob Grupp, a spokesman for Cephalon.
Meanwhile, AaiPharma spokeswoman Andrea Johnston told Bloomberg News her company is pleased with Cima's decision and expects the deal to close by year's end. Under AaiPharma's proposal, Cima shareholders would get nearly 1.4 shares of the new company for each Cima share, or a 41 percent stake in the merged company.
In contrast to Cephalon, which has $1 billion in cash, AaiPharma is saddled with debt and was hoping to use Cima's cash to pay down a portion of that debt. AaiPharma would have a hard time competing with Cephalon in a bidding war, Helfert said.
Cima generated $46.6 million in sales and $9.8 million in operating income in 2002. It has 274 employees at its headquarters and manufacturing plant in Eden Prairie and a new research and development facility and factory in Brooklyn Park.
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